IMF increases Turkey growth forecast

The International Monetary Fund (IMF) increased its forecast for Turkey's 2013 economic growth by 0.4 percentage points, from 3.4 percent to 3.8 percent, in its World Economic Outlook report, published on Oct. 8. The report also predicts an inflation rate of 6.6 percent for this year and 5.3 percent for next year. The report also forecasts a current account deficit (CAD) for the country of 7.4 percent this year that will fall to 7.2 percent next year. It also predicted unemployment this year at a rate of 9.4 percent that will increase next year to 9.5 percent.

Although noting the moderate recovery being made this year by emerging European countries, including Turkey, which it predicts will continue in 2014, the report said that risks and domestic policy challenges remain significant. It stated, “The recent global financial market volatility has led to some renewed tightening of local financial conditions, including in Turkey.”

On growth, the report stated: “The recent financial tightening is expected to result in some slowing of activity in the second half of 2013. In terms of annual growth in 2013–14, however, the impact of this slowing will be more than offset by the much-stronger-than-anticipated growth in the first half of 2013, reflecting the boost to domestic demand from monetary easing and a sharp increase in government investment.”

It stressed that further deterioration in external financing conditions is another major concern, particularly for countries with relatively large fiscal or external imbalances or both, such as Turkey and Serbia.

In another report published by IMF, this time on Oct. 4, the Fund asked Turkey to tighten its fiscal and monetary policies further while stating that the need to raise domestic savings remains a challenge for the economy. It added that “with the imbalances still high and the global financial environment less forgiving, reducing these vulnerabilities should be the overreaching focus of short and medium-term policies.”

The report also noted that increasing domestic savings and pressing ahead with structural reforms in the medium term would serve to increase the long-term growth potential of the economy while maintaining a sustainable external position.

Central bank rate hike remains uncertain

After a warning from the International Monetary Fund (IMF) earlier this week that Turkey's central bank needs to tighten its monetary policy to prevent an outflow of foreign capital, the bank may be forced to raise interest rates despite promises that it has no such plans in the offing, say financial analysts.

But the bank may be willing to risk the worst-case scenario of an exodus of foreign capital as it attempts to lift growth rates and remains skeptical of a wider tightening in global financial markets. “In the end they're taking on a big gamble. On one hand, raising interest rates may quash growth while they're looking to keep a recovery in line,” said Uğur Küçük, a financial analyst at İş Yatırım. “On the other, they're potentially neglecting the country's foreign financing needs with big consequences, so it may need to raise borrowing rates to attract foreign funders,” he said.

Turkey's economy, which grew 4.4 percent in the second quarter of 2013 and 2.9 percent in the first, requires nearly $5 billion of short-term capital flows every month to finance its gaping energy-import-driven current account deficit (CAD). The IMF this week warned that its CAD -- which hovers at around 7 percent of GDP -- was “unsustainable” and warranted higher borrowing rates to keep foreign money flowing. Those concerns come on the back of widespread predictions that Turkey will be one of the hardest-hit developing economies if the US Federal Reserve tightens its own monetary policy in the near future, ending foreign access to cheap dollars. This summer has seen a global financial rout from developing markets in anticipation of such a move from the Fed.